Selling Air India

Why it could be much tougher than the government thinks

The government of India finally put out its plan to divest Air India. The success of Air India divestment will be crucial to the fortunes of the government divestment program in fiscal 2018-19. The government will be keen to show a good performance in the fifth year of its term. The decision to split the company and sell it in parts is again a good idea, although it remains to be seen how it is implemented practically. But the real challenge could be about the timing rather than the idea. Here are 3 reasons the government could have a tough time selling Air India

Structuring the deal

The government needs to realize that when it divests its stake in Air India it virtually gives up its national flag carrier. After all, it is talking about selling 76% stake in Air India which means that the government effectively loses control over Air India. Secondly, the real estate assets will remain with Air India for 2 years but it is still not clear how the same will be monetized. Also, the bigger challenge is to monetize these assets at this juncture when the realty demand is weak and there are no established mechanisms for monetizing these assets. The restructuring of Air India itself will take time and the government will have a real challenge to complete the exercise this year. More so, when state and central elections are likely to take away a major chunk of their time and also their bandwidth!

What about the debt pile?

That is the billion dollar question. Air India has total debt to the tune of around Rs.46,000 crore of which the government will transfer Rs.12,000 crore to another company. The balance debt of Rs.34,000 crore will have to be repaid by the acquirer. The debt burden of over $5 billion virtually puts most of the smaller and mid-sized companies out of the race. It will either have to boil down to the large business groups or other airlines in consortium with global airline companies. Here again, the whole idea of selling the national flag carrier to foreign interests may become a critical poll issue in an election year!

It will be about crude prices

The big determinant of profitability for aviation companies is the price of crude. In the last 1 year the price of crude has already rallied to $70/bbl. With tensions in the Middle East, US shale production cautious and the Saudi Aramco IPO in the offing; crude oil prices are unlikely to come down in a hurry. That will mean that the profitability of airline companies will continue to be under pressure. After all, crude accounts for more than 65% of the cost of running an airline. Then there is the positioning issue. How should it position itself post-sale vis-à-vis industry leaders like Indigo. To cut a long story short, the actual sale of Air India is going to be much tougher. The ball is in the government’s court! ©

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